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17th Dec 2017

EU bonus cap to have little impact on bank pay

  • The EU's new bonus cap won't curb excessive pay, says ratings agency Fitch (Photo: Gideon Benari)

The EU's new bank bonus rules are unlikely to have much effect on executive pay, according to leading credit ratings agency Fitch.

In a paper published on Thursday (23 January), Fitch, which is one of the so-called 'big three' ratings agencies, said that it was "unlikely that compensation costs and benefits will fall significantly as a result of the bonus cap."

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"Compensation costs of five large European global and trading banks were 41 percent of net revenues on average for the first nine months of 2013, and we do not expect the new rules that come into effect this year to substantially reduce this ratio."

The bonus cap came into force this year, as part of new rules on capital requirements for banks.

Under the rules, banks can only pay staff bonuses on a ratio up to 1:1, with an exemption to pay bonuses on a 2:1 basis with the approval of at least 66 percent of shareholders.

EU lawmakers said the cap was aimed at curbing excessive risk-taking and speculation among executives.

However, the regulation has since been watered down by the European Banking Authority (EBA), the EU's London-based bank watchdog.

As part of a deal thrashed out in December, EBA relaxed the cap rules to exempt financiers earning more than €500,000 if agreed by regulators.

Fitch referred to a report released last week by German bank watchdog Bafin which found that only four out of fifteen banks surveyed had applied the EU salary cap, while four had awarded bonuses higher than double the base salary maximum allowed on the basis of shareholder approval.

The Bafin report also indicated that many German banks were failing to properly identify 'risk-takers' in banks. Fitch warned that confusion about the definition of 'risk-takers' could be replicated elsewhere.

"Inconsistent application of risk criteria could result in some banks getting around the bonus cap," it said, adding that reports suggested that many banks would simply increase salaries and share-options," it commented.

More than 3,500 EU bankers were paid more than €1 million in 2013, of which 75 percent are based in the UK, home to the bloc's largest financial services sector, and around 20 percent in Germany.

The UK issued a legal challenge against the legislation in September, claiming it was in breach of the EU treaties and would put European banks at a competitive disadvantage.

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